Kaushik Basu warns inflation shadow on direct cash transfer

With the United Progressive Alliance (UPA) government gearing up to implement the direct cash transfer (DCT) scheme, World Bank senior vice president and chief economist, Kaushik Basu, today cautioned that it might create a risk of inflationary pressure on the economy. he also indicated that the DCT should be indexed, in order to adjust with the inflation.

DCT is the Centre's plan of disbursing subsidies directly to the poor through cash transfer into their account, which to start with, will be implemented in 51 districts in 18 states across the country from January 1, 2013.

“Once DCT is implemented, there is a risk of higher inflation as more money is pumped into the system. However, we have enough tools to counter it,” said Kaushik Basu, who happens to be the former chief economic adviser to the Government of India.

As per the plan, government benefits like liquefied petroleum gas (LPG), kerosene subsidies, scholarships and pension payments will be given through the DCT scheme. However, Basu added that this needs to be indexed, so that the poor people are not affected by inflation.

“When you switch over to DCT, you index it. You have to index it, so that it does not erode with inflation. So that the people continue to have the same buying power,” he said, while speaking on the sidelines of the Indian Finance Conference organised by IIM Calcutta campus. Basu later clarified that the net impact of DCT on inflation might be negligible, as it is replacing subsidy.

Through the project, the government aims to disburse subsidies worth Rs 300,000 crore to the targeted beneficiaries. About 29 welfare schemes under various ministries will be transferred through Aadhaar-enabled bank accounts, targetting more than one million households in the country.

Reforms to bring back growth to 9-per cent mark

Backing the Centre's steps like foreign direct investment in retail, DCT, land acquisition bill and banking reforms, the former chief economic advisor said, “These reforms will bring back the growth to 9% mark again in the next three years. However, the next two years will be difficult for us due to the recessionary trends and major economic crisis in Europe.”

Meanwhile, Basu said along with the growth, if inflation can be kept at 5-6%, that will be comfortable for the country. “When you are growing rapidly, we have to live with some inflation. Real growth means you are getting more food more cloth everything which is a cushion against inflation. If we can keep at 5-6%, it will be worth it,” he added.

As per the government data released last week, the wholesale price index (WPI), the main inflation gauge in India, was down to a 10-month low of 7.24%.